Market watch, Dec. 7

Colder weather forecasts for most parts of the country helped push natural gas futures to another record high Wednesday, as the January contract surged by $1.10 to $8.49/Mcf on the New York Mercantile Exchange. The American Gas Association estimated that US gas inventories are 17% below year-ago levels.

Colder weather forecasts for most parts of the country helped push natural gas futures to another record high Wednesday on the New York Mercantile Exchange, analysts said.

The January contract for natural gas surged by $1.10 to $8.49/Mcf on the NYMEX, boosted in part by news that California is facing electrical brownouts because of gas supply shortages. Meanwhile, the American Gas Association estimated that US natural gas inventories are 17% below year-ago levels and down 15% compared to a 5-year average.

Robert Morris, senior energy analyst at Salomon Smith Barney Inc., earlier reported, "As some long-absent normal to colder-than-normal winter weather engulfs much of the country, the year-over-year natural gas storage deficit has continued to widen, providing further momentum to natural gas prices. In fact, no relief appears on the horizon, with an outlook for colder temperatures than last season."

He claims that, if US temperatures this winter merely match the 10-year average, gas storage levels are likely to be no higher than 600 bcf at the end of this winter, compared to 1 tcf last March. "This could put natural gas prices on an even stronger course (in 2001) than most of this year, even with a projected 5.7% increase in domestic production," he said.

Morris currently is projecting an average composite spot price of $4.25/Mcf for gas in 2001, compared to a Wall Street consensus of $3.75/Mcf. But even that higher forecast may prove too conservative, he said.

As an alternative fuel, home heating oil also benefited from the surge in natural gas prices, with the January contract jumping 3.52� to $1.0118/gal in a market where movements usually are measured in fractions of a penny. Unleaded gasoline for the same month also gained 1.99� to 78.21�/gal.

Analysts reported oil prices rallied late in the day with news that Iraq rejected a price formula proposed for its December exports by United Nations officials under the oil-for-food program. In addition, Iraq postponed a decision on the next phase of that program, which was supposed to be finalized this week.

The January contract for benchmark US light, sweet crudes increased 32� to $29.85/bbl Wednesday on the NYMEX, while the February contract was up 28� to $29.31/bbl. Both continued to gain in after-hours electronic trading to $30.27/bbl and $29.74/bbl, respectively.

In London, the January contract for North Sea Brent gained 22� to $28.01/bbl, while the February position increased 13� to $27.90/bbl on the International Petroleum Exchange. However, brokers noted that Brent futures prices are more than $4/bbl lower than they were a week ago and may not have bottomed yet.

The January gas contract lost 9� to the equivalent of $4.29/Mcf on the IPE.

On the Singapore exchange, North Sea Brent crude gained 22� to end at $28.01/bbl for January delivery, and the February contract rose 13� to $27.90.

The average price for the Organization of Petroleum Exporting Countries' basket of seven crudes was down 69� to $25.89/bbl Wednesday.

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